The Fear Index and Frankenstein Finance

by Paul Langley

The central character in Robert Harris’ 2011 novel The Fear Index is Dr. Alexander Hoffman, a Lake Geneva based physicist who has turned his hand to the hedge fund business with very lucrative effect. Having originally traveled to Switzerland from his native America to work on the Large Hadron Collider project at CERN, the socially inept Hoffman has been lured from science and into the world of high finance by the opportunity to pursue his obsessive passion for artificial intelligence. For Hoffman, his own wealth and notoriety is the unwanted side-show to VIXAL-4, the fourth iteration of his “machine-learning algorithm” which makes automatic trades on global financial instruments by analyzing massive flows of information including market data, media news stories and, as it transpires, terrorist websites.

The Fear Index provides some sharp commentary on various developments in our contemporary financialized times. Hoffman is, after all, a partner in a hedge fund, and not a commercial bank or even a testosterone-fuelled Wall Street investment firm. Gordon Gecko he is not. That role is ably performed by his partner, City of London exile Hugo Quarry, who measures his slice of the successes of VIXAL-4 in terms of the components that it will add to his under-order luxury yacht. Furthermore, the VIXAL-4 platform is something of an extension of the practices of high-frequency trading (HFT), where proprietary algorithms constantly churn out, send and cancel orders for this or that asset. According to an article in The Economist magazine’s recent Special Report on Financial Innovation, algorithmic trading now accounts for roughly 65% of total trading in equities markets, 45% in futures, and 30% in options. And its share is projected to continue to grow significantly. As they put it, “People have gone from trading in open-outcry pits to trading via screens to programming algorithms”.

Moreover, the title of Harris’ novel is itself the colloquial name given to the Chicago Board of Exchange’s Volatility Index, or VIX. Little noticed in the financial media over its first fifteen years or so, the VIX came to the fore during the intense months of crisis in autumn 2008 as a kind of ticker for collapsing market confidence. What the VIX tracks, in short, is the price of option contracts that give the holder a right but not an obligation to buy S&P500 index stocks at a set price over a future period. As Hoffman describes the VIX to a group of prospective investors in VIXAL-4: “If you want the math, it’s calculated as the square root of the par variance swap rate for a thirty-day term, quoted as an annualized variance. If you don’t want the math, let’s just say that what it does is show the implied volatility of the market for the coming month. … The higher the index, the greater the uncertainty in the market”.

It is, however, the difference between the VIX and VIXAL-4 that is crucial to the dark and dystopian vision of present and near-future finance that The Fear Index ultimately presents, what we might call Frankenstein finance. While the VIX is based on calls and puts for options on S&P 500 stocks, VIXAL-4 seeks to isolate and profit from the behavioural effect of fear and the anomalies it creates in asset prices. In Hoffman’s words, again to prospective investors: “One thing we’ve been able to do … is correlate recent market fluctuations with the frequency rate of fear-related words in the media … we live in a world not of real things but of opinion and fantasy. The rise in market volatility … is a function of digitalization, which is exaggerating human mood swings by the unprecedented dissemination of information via the internet”. And, crucially, VIXAL-4 is an example of what the aforementioned article in The Economist terms “the next stage … self-learning systems, in which sentient algorithms mine the capital markets, spotting correlations that are too complex for humans to see”. It is thus Hoffman’s struggle with fear - both his own anxiety and panic, and that anticipated and preempted by a VIXAL-4 which has escaped the control of its own creator – that culminates in his violent and desperate attempts to shut down the machine as the book reaches its climax.

That today’s financial markets are monstrous is beyond doubt. But, on reading The Fear Index and the insights it holds on hedge funds and HFT, I was struck by the disempowering consequences of thinking in terms of Frankenstein finance and of beginning, as the book does, with Mary Shelley. A more positive re-politicization of finance remains possible. In this respect, what anthropologists and like-minded social scientists have begun to contribute to the public understanding of the materiality of high finance in recent times - the technicality, physicality and corporeality of its assemblages - is precisely an awareness of its contingency and fragility. And, this careful analytical puncturing of the fictions and abstractions of apparently automatic and all-embracing financial circulations serves to open up political space for disagreement and dissent. Finance needs an anthropology, then, but one that is prepared to be more confident about the political implications of its own analyses and which does not collapse back into the despair, hopelessness and yearning for a simpler humanity which engulfs Hoffman in the face of VIXAL-4.